US Economic Policy Impact on Asian Economies - Research Paper Example

? US Economic Policy Impact Asian Economies of the of the Contents Contents 2 Introduction 3 End of Quantitative Easing 3 U.S. Interest Rate Maturing and Reinvested U.S. Debt held by Asian Economies 5 Disadvantages of U.S. Economic Policies on Asian Economies 6 Advantages of U.S. Economic Policies on Asian Economies 7 Conclusion 9 References 10 Introduction After globalization, the state of commercial and non-commercial affairs of the different countries had become highly integrated with each other. It has been claimed by the researchers that after all the economies of the world were opened up, the growth of the developed nations became sustainable and the scope for progress of the developing nations was also improved. In the current epoch, the changes in the state of affairs in one country create a spill-over effect in the economies of the other nations. This is the reason for the growing importance of the so-called International Policy Coordination. The countries, at present, have undertaken joint policies for the respective economies. However, it is often noted that the benefits of the policies are not equitably allocated among the nations. This research paper will concentrate on the impact of U.S. economic policies on the Asian economies (Abeles, 2001). End of Quantitative Easing The property bubble in the European and American economy had generated severe economic crisis in the market of U.S. around 2009. The velocities of money circulation in the economies were low then and even the degree of productive investments was scare. The commercial banks did not have adequate reserves in order to lend to the capitalists, willing to invest in the economy. At this juncture, the public authorities of U.S. undertook the decision of adopting the tool of Quantitative Easing. Quantitative Easing is a type of special monetary policy that is undertaken by the central bank of a country to stimulate the economy in a recessionary stage. This is basically a type of open market operation where the central bank purchases long term fixed financial assets from various financial institutions and commercial banks in the economy. This is how the monetary base of the economy is increased. Thus, in order to recover the economy from the recession trap, the Federal Reserve undertook the policy of Quantitative Easing, since the value of bond price and interest rate in the market is inversely related. The high demand for fixed assets by the central bank had lowered the market interest rate in the economy of U.S. Thus, with the help of Quantitative Easing, the financial reserves available with the commercial banks increased and the banks could offer the accumulated reserves to the potential investors in the economy. Ultimately, the tool of Quantitative Easing helped to recover the economy of U.S. from the recessionary stage. However, it had been claimed by the U.S. government that the level of Quantitative Easing would reduce if the U.S. economy had generated a productive growth in the market. In the month of May 2013, the chairman of the Federal Reserve, Ben Bernanke, had finally declared to taper quantitative easing (Eichengreen, 2011). As a result of this business decision undertaken by the Federal Reserve, the long term interest rates in U.S. increased and the foreign domestic stock market level declined to some extent. There were many public officials who claimed to defer the quantitative policy, but the Federal Reserve claimed that it was crucial for U.S. to rise from it’s near-zero interest rate trap. As the first step directed to end the Quantitative Easing, the Federal Reserve had lowered the bonds purchase in the economy. This resulted in lowering the demand for fixed assets in the market, thereby leading to the rise in the interest rate of the economy. However, presently, as a result of this initiative undertaken by the Federal Reserve, the demand for Dollar has significantly increased in the world market. This is because Dollar is a flexible currency and has a high value in the market (Tucker, 2010). The investors who invest money in different economies fear that in future the supply of dollar would reduce in the market as the U.S. central bank has decided to taper the Quantitative Easing. This is the reason for which many investors, who had invested money in the different equity markets of several Asian economies, have started to withdraw these funds and reinvest them in the U.S. assets. U.S. Interest Rate Maturing and Reinvested U.S. Debt held by Asian Economies The decision undertaken by the U.S. government, to increase its interest rates and taper the tool of Quantitative Easing, has created heavy impacts on the Asian markets. These investors analysed that the current account deficits of these economies is much more than that U.S. Thus, such U.S. government policies would increase the interest rates of the Asian economies and heighten the cost of investments in the same. So, the levels of speculative investments in the developing economies have decreased in the fear of rising interest rates in the U.S. economy. This is because these investors feel that the rise in interest rates in the U.S. economy would increase the level of the same in the Asian economies. It has been noted that the economies of India and Indonesia requires adequate capital investments for the purpose of economic growth. The levels of Foreign Direct Investments in these economies have fallen after the rise in the interest rates in U.S. economy. These Asian economies are experiencing lower values of currencies in the current era due to the low trade balances. It is also observed that these economies are experiencing inflation rates of more than 8%. Large sums of equity portfolio in Asian economies like, Japan and China have been withdrawn by the investors and reinvested in the booming market of U.S. Figure 1: Government Debt Levels (Source: Matthews Asia, 2013a) As stated in the above bar graph, the level of government debts in the Asian countries like, China, Indonesia and India, is much less than that of the western developed nations like, Greece, U.S. and U.K. Thus, it is expected that the requirement of non-expansionary fiscal policies in these Asian economies is less than that of western nations like, U.S. The Asian nations require more supply of money for enhancing its growth rates. However, this is not the reality. The non-expansionary policies in these nations are dampening the growth rates of these countries and lowering the value of its currencies. However, it was claimed by the U.S. government that, amidst the short-run difficulties, the Asian countries would enjoy special benefits in the long run due to this change in the economic policy (Joyce, 2012). Disadvantages of U.S. Economic Policies on Asian Economies The above context of the paper explains that there are several problems experienced by the Asian countries after the recent changes made in the economic policy of U.S. The levels of Foreign Direct Investments in Asian nations have fallen. The growth rates of the countries have also dampened and the currencies have devaluated. The overall productivity of the Asian nations has reduced due to unnecessary non-expansionary fiscal and monetary policies undertaken by the governments. The portfolio markets have become highly uncertain in these nations. Advantages of U.S. Economic Policies on Asian Economies Despite the short run negativities, the changes in the U.S. economic policies have bestowed many benefits to the Asian nations. United States is one of the biggest economies that import a large number of commodities from the Asian economies. After the emergence of globalization, the degree of trading activities of the Asian countries like, China and Japan, with U.S. have significantly increased, thereby increasing the level of export income of these Asian economies (Nechyba, 2011). Moreover, it is true that the increasing demand for Dollar, in the current era, (due to Quantitative Easing) have depreciated the currency value of the Asian nations (due to decreasing level of investments). However, it must be considered that devaluation or depreciation of the Asian currencies always offers them a chance to correct their current account deficits. In a country with low currency value, the level of exports is always more than that of imports. This is because the value of exports of the country, in terms of its currency, is lower than its import value, in terms of the currencies of the foreign economies. The Asian economies might have a current capital account deficit due to the low level of investments at present, but the trade balances of these economies can improve with the help of rising exports compared to the import levels. Many Asian investors from countries like, Japan and China have invested heavy funds in the equity and asset market of U.S., which has helped these investors to earn high returns in terms of the high Dollar currency value. The business marketers in the Chinese economy have realized that the U.S. growing market would be highly profitable for China in future. This is because increasing trading activities in these nations would enhance the brand value of Chinese products (Kapp, 2012). The rising investments of the Asian investors in the U.S. market have augmented the business competences and efficiencies of the domestic markets of the Asian economies. It is also expected that in the near future, the outsourcing of labour resource in the growing U.S. market would eventually increase the national products of the Asian nations (Matthews Asia, 2013b). Figure 2: Household Debt as a Percentage of GDP (Source: Matthews Asia, 2013a) It is clear from the above bar graph that, as recorded in 2012, the level of household sector deficit in the Asian countries like, India, China and Japan, are much lower than that of the western countries like, U.S. This proves that the overall available economic resources in the hands of the individuals are relatively higher in the Asian countries than the U.S. It has also been claimed by the researchers that the level of foreign exchange debts of the Asian countries has substantially reduced in the recent years. This is due to the current account surplus in many of the Asian nations like, China and Japan. The Asian countries are now considered to have higher productivity rates and wealthier population than the western economies in the world. Thus, it is highly rational to infer that the Asian countries must try to sustain their good economic relations with U.S. for their long-term growth (Damodaran, 2008). Conclusion The public authorities of a nation must forecast the long-term benefits of an economic policy instead of simply concentrating on the short run factors. It is true that the changing U.S. economic policy had negatively influenced the Asian countries initially, but the context of the essay states that in the long run, the Asian nations would significantly improve with the essence of U.S. growth. History has proved that the growth of the developed nations has carved the path of evolution for the developing nations. Thus, the Asian countries should consider the long-term perspective and enhance its transactional relations with U.S (McEachern, 2012). References Abeles, T. P. (2001). The Impact of Globalization. On the Horizon, 9(2), 2 – 4. Damodaran, A. (2008). What is the riskfree rate? A search for the basic building block. NYU. Retrieved from http://people.stern.nyu.edu/adamodar/pdfiles/papers/riskfreerate.pdf. Eichengreen, B. (2011). International policy coordination: the long view. NBER. Retrieved from http://www.nber.org/papers/w17665.pdf?new_window=1. Joyce, M. A. S. (2012). The financial market impact of quantitative easing in the United Kingdom. Charleston: BiblioBazaar. Kapp, R. A. (2012). The impending tide of Chinese investment in the United States. Retrieved from http://www.nbr.org/publications/element.aspx?id=646#.UqlMrid8Uwo. Matthews Asia. (2013a August 30). Matthews Asia perspective: India and Indonesia. Matthews Asia. Matthews Asia. (2013b June 21). 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